In 2013, Macro Corporation acquired Waltham Motors Division
Macro Corporation made few changes in either the company’s operation procedures or systems
The company transferred the services of Sharon Michaels and David Marshall from Macro Corporation to Waltham Motors Division in April 2004 and May 2004, respectively.
In April 2004, the company lost some contracts.
The plant accountant did not make adjustments for the May 2004 budget following the loss of some contracts.
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The report indicates that the division had lost $7,200 in May, instead of the budgeted profit of $91,200.
The report also indicated that the plant is under budget on every single cost, except for supervision.
Analyze the report that was presented by the accountant. Do you agree with his conclusions and recommendations?
Analysis:
Total Budgeted Cost
Cost Per Unit
Total Actual Cost
Cost Per Unit
Variation in Cost
Budgeted Cost of Direct Material
Actual Cost of Direct Material
Following this analysis, the actual manufacturing cost was higher than the budgeted manufacturing cost. The actual cost exceeds the budgeted cost by $6.581. Thus, the company incurred an operating income loss. Secondly, the actual cost of per unit of direct material ($6.1) is higher than the budgeted cost ($5.7). In addition, the actual cost of direct labor is higher than the budgeted cost. Based on this analysis, it is highly likely that the company produced more units that it actually sold. This variation can be attributed to the loss of some contracts. The company is under budget on almost every single cost. Thus, I do not agree with the analysis of the plant accountant.
How can the cost control process be improved?
In order to improve the cost control process, the management ought to determine the factors causing the variations in costs. From the analysis, it was evident that the firm was producing more units that it actually sold. Since the company lost some contracts, it should reduce its production capacity accordingly. The division should utilize its resources, such as direct materials and labor, efficiently to improve the cost control process.
Prepare a flexible budget and estimate the line by line variances. How does this result compare with the report presented in question #2.
|
Flexible Budget |
Sales |
||||||
|
Actual |
Variance |
Flexible |
Variance |
Budget |
|||
| Unit Sold |
14,000 |
0 |
14,000 |
4,000 |
U |
18,000 |
|
| Sales Revenue |
$686,000 |
$14,000 |
F |
$672,000 |
$192,000 |
U |
$864,000 |
| Variables Costs |
$432,000 |
$33,156 |
U |
$398,844 |
$113,956 |
F |
$512,800 |
| Contribution Margin |
$254,000 |
($19,156) |
F |
$273,156 |
$78,044 |
F |
$351,200 |
| Fixed Costs |
$261,200 |
0 |
U |
$261,200 |
($1,200) |
U |
$260,000 |
| Operating Income |
($7,200) |
$274,400 |
F |
($267,200) |
$358,400 |
U |
$91,200 |
This report is more appropriate because it considers the actual amount of units sold.
Prepare a comprehensive variance analysis, i.e. computing the price variances and quantity variances.
| Actual | Budgeted | Variance | ||
| Direct Material |
$85,400 |
$108,000 |
($22,600) |
F |
| Labor Cost |
$246,000 |
$288,000 |
($42,000) |
F |
| Variable Cost |
$432,000 |
$512,000 |
($80,000) |
F |
How do you dispose of the variances for the variable and fixed costs on the books of the company?
Variance for fixed and variables cost on the books of the company are disposed of by replacing direct labor cost and direct material cost with the actual figure.
How is the report from question 5 useful to improve the cost control systems of the firm?
The report from question 5 is useful if it helps improve the cost control system of the company. The report from question 5 helps the management of the company identify areas that have incurred huge variances. This will help the company update its budget.
